How important is company culture?

Written by Jason Morris on Friday June 15, 2018

In financial services a lot of discussion has centred on culture in recent years. In the UK, the conduct regulator, the Financial Conduct Authority (FCA), has written numerous papers on culture, and continues to include it as a priority piece of work in its business plan. But what is company culture and why does it matter so much?

The culture of a company is, fundamentally, its personality. Once this ‘personality’ is known it is so much easier to get a business to work to its strengths and to manage its weaknesses more effectively. Fundamental to this is ensuring the workforce align to the culture. Employees are much more likely to enjoy their time in the workplace, and consequently, be more productive, if they fit in with the company culture. This behaviour positively affects the overall culture too, so the compound effect of all employees is that the culture becomes more deeply embedded in the organisation. The flipside also applies, so those that do not fit in with the culture will be less happy, and therefore, could negatively affect the company culture.

How important is company culture?

There are numerous examples of how a poor culture can affect how a company is perceived – BP, Toshiba, FIFA and Volkswagen (VW) are examples of institutions within which the public often agree something is wrong with the culture. If you consider VW, for instance, what comes to mind? If it is the emissions scandal that they were embroiled in a few years ago, then that illustrates how a poor culture can follow a company around. After the scandal broke, significant issues relating to culture were uncovered, and these were key in driving one of the biggest and most successful car manufacturers into cheating emissions tests in order to ensure that their cars appeared less polluting than they actually were. VW were recently fined €1 billion by German prosecutors over the emissions scandal.

Arguably, VW will forever be labelled as a ‘cheat’ because of its conduct, and this is undoubtedly a heavy price to pay for some very ill-judged decisions. The key to this example though, and one which neatly illustrates the influencing factors in relation to culture, is the behaviour of the senior management at the company.

Culture is an intrinsic part of an effective corporate governance programme, or at least, most people would agree that a good culture is the foundation of effective governance. The problem is that nobody really knows how to introduce good culture into a firm. Instead of treating it as the vitally important element that it is, senior management very often file it away into the ‘too hard to do’ drawer, mainly because there’s no tangible profit to be made from taking on such a project.

The most recent FTSE 350 Corporate Governance Review did show that there have been improvements in the focus on culture – however, it went on to highlight that only 21% of CEOs referred to culture in their annual reports in any meaningful way and that 43.6% of company chairs make no reference to culture at all, demonstrating that there’s still some way to go before culture becomes a key target for companies.

How does a company improve its culture?

The continuing view is that it is as important as ever that the board sets the correct ‘tone from the top’, leading by example and ensuring that this ‘tone’ permeates through the rest of the company. Arguably, the CEO is the individual most responsible for setting a company’s culture, so has a vital role to play in establishing the values that best support the desired culture of the firm, and, crucially, ensuring their own working practices and interactions with the company are consistent with the values that underpin this.

The idea is that this will influence the right behaviours amongst the rest of the workforce, and these behaviours will be consistent with the company’s strategy.

A company’s focus on culture should be continuous, not just referred to in times of crisis. This will help to embed the right behaviours at every level of an organisation. A monitoring programme can allow a company’s board to evaluate the culture on an ongoing basis and challenge senior management.

It is important to have sufficient resources allocated to the evaluation or assessment of culture, and this is something the board can control. This alone is a strong indicator of how good the culture is at a company, because the more resource provided for this function suggests a company intent on developing a good culture going forward.

Additionally, this activity allows the board to check that the company values are fully understood, and that the behaviours displayed by employees at different levels are consistent in relation to the culture.

Of course, measuring culture is a difficult task, but it is important to be able to do this if a monitoring programme is to be effective. According to the FTSE 350 Corporate Governance Review, 25.2% of firms use the employee survey or engagement to measure culture, 15.4% use health and safety, and 8.9% use employee matters such as promotion, recruitment, retention, turnover and absenteeism. These are the three main measures used, and tend to provide a reasonable overview of the culture within a firm.

The focus on culture is unlikely to go away. In fact, I would suggest that it will become more and more important to firms in the future. Any company that puts measures in place to improve this particular area of their business, and operates in a culture that promotes good behaviours and provides employees with positive experiences, can also look forward to the financial rewards as a result of an enhanced reputation and a more productive workforce.

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